Causes of Super Challenges

EghtesadOnline: Iranian policymakers and people are laboring under the delusion that governments are solely responsible for providing cheap resources to the public, the special presidential aide for economic affairs said.

News ID: ۷۴۳۸۰۸

18 September 2017

Masoud Nili also noted that this misconception gives rise to excessive spending on the part of the government, which causes chronic budget deficits and overconsumption on the part of people.

He stressed that correcting this 70-year-old vision is one of the necessities of Iran’ economy.

Originally published by the Persian daily Donya-e-Eqtesad, the translation of his analysis of how Iran’s economic woes emerged and then grew into super challenges follows:

The discourse on the future of economy is of prime importance, anywhere, anytime. But it has currently taken on greater importance. It is not wrong to say that the path the economy will take in the next few years would be fateful.

There are few scenarios ahead of the Iranian economy and each will take the country to a certain destination. What draws a sharp distinction between these destinations is how the country would deal with six economic super challenges it is facing today, namely unemployment, the embattled banking system, budget deficit, troubled pension funds, water shortage and environmental woes.

> A History of Iranian Government

The first step for solving a problem is to see how it was created in the first place. Imagine each of these super challenges as a living creature: We need to know when it was born and what path it took to get to this current state.

In fact, it is best to start our pathological study from exploring the role of the government since it has been the most effective institution in Iran’s economic history over the past 70 years.

Major developments in Iran’s economy were initiated in the 1950s when agriculture was the mainstay of the nation’s economy and the government’s resources were limited.

About 13 million of 16 million Iranians lived in rural areas and only three million lived in cities. The government’s capacity to provide educational and health care services was limited.

Oil export revenues in the early years of the 1950s amounted to $18 billion (based on current prices)–a remarkable figure for a country that had a gross domestic product of $40 billion.

Urbanization expanded substantially in Iran, thanks to oil revenues and the government played the role of public service provider. Industries were also created through the government's direct intervention. These developments led to the notion among people that the government can act as a catalyst when it comes to the gradual development of a country, as if development is initiated and continued by the government.

In other countries, the economy involves three phenomena of government, city and industry, and their formation takes a long time. Statesmen were now reliant on oil money to carry out projects they believed were shortcuts to advancement.

> Seeds of Economic Problems Sown in a Golden Age

Strong economic growth and investment won the title of "Golden Economic Age" for Iran in the 1960s.

However, the seeds of Iran’s thorniest economic problems, that is chronic budget deficits, were also sown in this period.

To Iranian politicians, budgeting was deemed unnecessary. They were determined to implement quixotic projects at any price, without heeding experts’ warnings about limited resources.

Nikita Khrushchev, former prime minister of the Soviet Union, once said, “Politicians are the same all over. They promise to build a bridge even where there is no river.”

The interesting point is that, budget deficit was there even in the first half of the 1970s when the country was flush with petrodollars.

After the 1979 Islamic Revolution, governments adopted the same attitude toward the country's development, except for one change: They incorporated the concept of "justice" into the governance. In fact, the only flaw detected by revolutionaries in the conduct of former governments was their disregard for justice.

And justice had a special definition: It was not redistribution of wealth, but rather the universal distribution of wealth. As a result, a government was formed with vast, exhaustive and costly responsibilities that paid virtually no attention to the concept of scarcity of resources.

The dramatic growth of population in the early years of the 1980s coincided with the eight years of Iran-Iraq War and both these pushed up the government’s expenditure.

The country’s revenues from oil exports in the fiscal 1988-89 reduced to one-sixth of what it was in 1978-79, while government spending nearly halved that year. This translated into a massive budget deficit of around 53%, out of which 50% were funded by borrowing from the Central Bank of Iran. The budget deficit in the 1960s turned into a deep, old wound that has yet to heal today.

Financial constraints of those years led the government to tap into other sources, pension funds and banks in particular. There were considerable resources in pension funds, thanks to many young civil workers and few retirees. The government used pension funds to finance its spending, marking the onset of its enormous debt to pension funds. Banks were also asked to spend their resources, based on whatever terms the government deemed expedient.

The budgetary disease of the government was passed on to pension funds and banks, and the two key institutions had to struggle with financial shortfalls.

In addition, regulations governing energy carriers’ transactions were influenced by the concept of "justice". The government was tasked with providing them at low prices—independent of the rate of inflation—to consumers. Consequently, energy consumption grew exponentially, despite the unchanged level of oil production.

(As we speak, energy consumption in Iran is among the highest in the world. Unrestraint consumption of energy is to blame for nearly 80% of pollution in big cities.)

The same approach was applied to water. People were granted unfettered access to water according to a law passed in the fiscal 1982-83, which allowed extraction of large amounts of groundwater.

There is a simple rule here: A commodity shows imbalance when output exceeds input, causing a net decrease in the amount of that commodity. Water shortage would turn into a crisis, if it is not tackled properly.

A condition similar to that of water is observed in the management of pension funds. New employees of the government should provide for retirees. Employees of the past decades will reach retirement age and there wouldn’t be adequate funds if the government stops employing new people. What has happened in the Civil Servants Pension Organization is one of the most outstanding examples of the country’s pension funds.

Normally there should be six employees for each pensioner whereas the ratio has now declined to 0.9 to one.

The events of the past decades show that the country's welfare largely depended on the excessive consumption of natural resources (water, energy) and financial resources (banks and pension funds). In other words, amenities provided for the citizens in the past and present were taken from the share of future generations.

Quantitatively speaking, Iran's GDP is around 70% of what it was in 1976-77, whereas per capita consumption expenditure has increased by 1.7 times. So far, natural and financial resources have been used to bridge the gulf between revenues and expenditure, but these resources are finite. Failure to put the brakes on the growing consumption of resources would lead to an impending crisis.

The five super challenges posed by the budget, pension funds, banking system, environment and water can gradually create hurdles for investment and fail to realize the fundamental need of the Iranian economy: large-scale employment generation.

To create annually one million jobs for a population that were mainly born in the 1980s, the country needs significant investments. This is while natural and financial resources have been wasted, giving way to another super challenge that is unemployment.

> First Step: Acknowledge Past Mistakes

What is clear is that these super challenges were the handiworks of policies we took over years; no one from outside the decision-making system threw us a curveball.

The first step to putting proper policies in place is to accept the past mistakes and solve these issues, apart from political wrangling in a peaceful setting. None of these problems cropped up overnight; on the contrary, they all developed gradually.

Strategic blunders will recur if we adopt solutions without prior assessment and acceptance of past mistakes. Water shortage will persist if we do not work out a solution for water management and only direct our attention toward water supply.

What created these super challenges was built on an unsustainable definition of the relationship between people and government, which lacked one of the central principles of economics: scarcity of resources. Changing this definition is neither easy nor quick, whereas resources are being depleted at an ever-increasing rate.

Years ahead offer a golden opportunity for us to change the course of the country, which is of course not possible without having public discussions to convince the society.

The government proceeded down a potholed road of small and big challenges. And now it needs a serious revision to steer away from this road. Although making a sudden about-face might lead to social, political problems, it is the first move for addressing these super challenges.

Today the economy is marked by crowning achievements, including outstanding economic growth and low inflation rates, thanks to a shift toward rationalism, but that was within “the current structural system”. What we deeply need is to continue the use of logical reasoning in problem-solving and couple that with a steely determination to change “the current structural system.”

That we managed to achieve valuable results is the harbinger of more to come, provided we make the most of our time to build the future and mark 2021-22 as the beginning of a century with hopefully fewer economic mistakes.